Defining SME Investing
Small and medium enterprises (SMEs) generally occupy the space between micro-enterprises and large corporations. An often ill-defined space, definitions of what constitutes an SME vary greatly across industries, governments and financial institutions. The most commonly accepted definitions focus on the number of people a company employs or the company’s annual revenue (turnover). Using these conventional categories, the companies that SEAF invests in generally employ between 20 and 250 people and have annual revenues of between $200,000 and $15 million; however, these ranges differ greatly for different investment vehicles, industry sectors and countries.
For more information on an alternative methodology to categorize SMEs, which adjusts for the unique environments in which we invest, please refer to Defining SMEs: A Less Imperfect Way of Defining Small and Medium Enterprises in Developing Countries (Brookings, September, 2008), written by SEAF co-founder Tom Gibson and SEAF CEO and co-founder Bert van der Vaart.
The Missing Middle
We believe that SMEs are vital to the health and stability of any nation. They traditionally constitute the largest portion of the employment base, hire the greatest number of new employees, and provide the majority of a country’s goods and services. Many developing countries lack a vibrant small business sector, and, as a consequence, a growing middle-income population. And yet despite their importance, SMEs in emerging markets frequently suffer from insufficient access to financing, preventing these businesses from expanding their production and making a larger social and economic impact.
Entrepreneurs seeking financing in these markets are up against the perception of local commercial banks that SMEs are too ‘risky’ for traditional loans, and yet they are also too large for the growing number of microfinance programs. This gap in financing leads to what has increasingly been referred to as the missing middle. In SEAF’s experience, the lack of risk capital to the missing middle substantially diminishes the growth potential of these small and medium enterprises and, consequentially, has a profound negative impact on employment, the development of a middle class, and tax revenues that are essential to a country’s development of their social sectors. A vibrant middle economy is a key element in job creation, on the job training, poverty reduction, wealth creation, sustainable economic growth, and stability.
The SME Opportunity
SEAF’s experience is that direct investment in SMEs supports sustainable economic development. We have seen first-hand that facilitating the growth of these companies by providing access to risk capital and business assistance can empower a company to overcome the impediments to its growth and lead to its production of higher value-added products or services for both domestic and international consumers, while accelerating the development of its surrounding community. SME investment leverages promising businesses to catalyze socioeconomic growth and entrepreneurship in local communities and markets. When done correctly and sustainably, such investment also produces significant returns for our investors.